Vanguard founder Jack Bogle said in 2017, “If everybody indexed, the only word you could use is chaos, catastrophe.”
He added that the chance of that happening was “zero.” What he meant, though, was that a fully passive market would have no trading. So, it would collapse.
While Passive money has in large part coopted investment, our problem today isn’t a paucity of trading. The market is frenetic, thanks to the arbitrage mechanism on which ETFs depend, ubiquitous options and futures, quantitative tactics (subscription required), algorithmic trading.
The CBOE says stocks are trading 18 billion shares daily in April (down from 20 billion in March), over $900 billion of notional value. We’re not wanting for activity.
But where is it all coming from? It’s not like there are shares just sitting around unowned. The stock of public companies is generally fully owned by somebodies, ranging from Blackrock, Vanguard, State Street and Fidelity, to company insiders.
NVDA has roughly 24 billion shares outstanding, held mainly by nearly 6,000 institutions reporting positions via 13Fs, plus those under the reporting threshold, plus insiders, plus retail investors.
Net the buying and selling, public companies, in your own stock, quarter over quarter, year over year. For NVDA, the net change from Dec 2024 to Dec 2025 was about 218 million shares.
NVDA regularly trades 100 million shares or more daily. So the net change in ownership is less than 1% – as NVDA trades all its outstanding shares in a year.
How? I mean, go to the grocery store for, let’s say, mint, and if they don’t have it, you can’t buy mint.
Never happens in the stock market, even though all the stock is owned (well, so long as you’re buying 100 or fewer shares).
The truth is, the stock market doesn’t depend on owners for shares at all.
Take ORCL. Like NVDA, its top holders of ORCL are Blackrock, State Street, JPMorgan (one of the largest “buyside” asset managers now, even though it’s a “sellside” firm) and Geode Capital, the systematic arm of Fidelity that’s now a top-ten owner of US equities.
Guess who the number nine and ten owners are? Jane Street, Susquehanna. They’re proprietary traders. Their positions are put/call holdings. They’re the largest market-makers in ETFs and options.
ORCL traded 50 million shares a day last week (twice its average), 250 million shares the past five days through Monday, almost $50 billion of stock in total, or 10% of its market cap. ORCL Short Volume – borrowed or created stock – shot up about 37% last week, rising even more rapidly than ORCL’s price, from 38% to nearly 50%.
Why should a stock with a half-trillion dollars of market cap move 28% in a week? Well, it shouldn’t! But why did it?
Jane Street et al. They don’t need any underlying sellers of stock to move the price.
Listen to this, investors and public companies. It’s why you must have a grasp on how the market works. There is no supply of stock. It can’t just – voila! As the French say – expand and contract to handle buying and selling.
But options can. And ETFs can. Those two are as elastic as currencies.
Here’s how it works:
Blackrock et al write on the ETF creation grocery list “ORCL.” Jane Street, like Morgan Stanley, is an authorized participant creating ETF shares and maintaining the “arbitrage mechanism” for Blackrock that aligns ETFs with the stocks they are meant to track.
So Jane Street buys options on ORCL. It’s not a customer trade, so they can front-run it.
And the stock rises.
And people chase the stock. And Jane Street sells them created shares, and short volume rises 37%. And the stock goes up 28%. And because ORCL is in all kinds of ETFs – 567 of them according to Vettafi – the entire market surges as arbitragers lift stocks to align with ETFs.
Look, I’m illustrating the complexity of the market with an example. But this is how the market works.
It’s not constrained by supply — despite supply constraint. With ETFs and options, the market’s capacity to absorb demand is nearly infinite, which is why it exhibits a preternatural propensity to rise, as though there is no war, no budding European and Asian energy crisis, no inflation.
It’s why boards and c-suites best understand how the stock market works. It’s full of artificial supply with astonishing capacity to alter outcomes and obfuscate facts. Investors: You better know Demand and Supply to cut through this fog.
Monday and yesterday, banks were truing up the books on trillions worth of derivatives trades. Machines are responding to every little thing the President says. Arbitragers are trading oil and market volatility in tandem.
You can’t have a market driven by fleeting prediction-market bets and simultaneously depend on that market for fundamental and economic signals and the stability of retirement accounts.
Something is going to break.
Until then, it’s what we’ve got. I don’t like a market driven by arbitragers, fleeting participants in derivatives. But I understand it. You must as well.
